Establishing Model Risk Management
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1. Background
Post-mortem analysis of the 2008 Global Financial Crisis attributed it partly to poor Model Risk
Management (“MRM”). Subsequently, with increased industry experience, the Federal Reserve
and Office of the Comptroller of the Currency (“OCC”) introduced the Supervisory Guidance
on Model Risk Management (“SR 11-7”) that provided key conceptual clarity for all phases of
model life cycle management. MRM has been a key regulatory mandate in the banking sector
since.
Subsequent circumstances, like the market reaction to COVID-19 and the growth of algorithmic
trading, reminded banking institutions of the importance of these frameworks and the need for
real-time model performance monitoring. Recently, industries outside of banking have
considered adopting relevant portions of this statement to mitigate the financial, capital,
operational, decision-making, regulatory, and reputational risks attributable to model usage.
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